2019 budget and oil price volatility

A recent drop in the international price of crude oil has re-echoed the great need for a total overhaul of the management of the Nigerian economy. This development calls for the urgent need for a focused diversification of the Nigerian economy, which should go beyond mere rhetoric to concrete actions. Otherwise, the economy will continue to go through this perpetual spiral or periodic ups and downswings, as has been the case since the 1970s. Latest information about the state of the international market for crude oil indicates that the price for Nigeria’s Bonny Light crude currently hovers around $58.5 per barrel, which is below the benchmark price for crude oil in the 2019 Federal Government budget, set at $60.0 per barrel, considered by many as dicey from the outset. This downturn in the price of crude oil automatically presents a real threat to the smooth implementation of the 2019 budget. Currently external reserves have dropped by about eight per cent.

In the 2019 budget, the projected revenue expected from the oil sector is about 52 per cent of the total revenue profile of the budget. This is quite significant for the revenue projections of the budget. Apart from oil revenue, the next major sources of revenue expected to fund the budget are revenues from corporate income tax (11.5%), JV equity restructuring (10.2%) and independent revenue nine per cent (9%). Other sources such as customs duties, value added tax and grants and donor funding are largely insignificant at about four per cent (4%) or less of the entire revenue projections for the 2019 budget. Despite the orchestrated efforts being made by the Federal Inland Revenue Service (FIRS) to further boost tax revenue in funding the budget, the growth potential of this revenue source appears grossly limited given that many corporate organisations are struggling to stay afloat in the current unfavourable economic climate such that a further increase in taxes would further imperil the functioning of the private sector with incomes hardly increasing.

Besides, even the informal sector is also seriously challenged by pervasive uncertainty in the economy. The state of the stock market is quite instructive as to the poor operating conditions of many firms that a good number of them are even shedding jobs to stay afloat.   Even with the expected shortfall in revenues, recurrent (non-debt) spending in the 2019 budget is projected to rise by at least 34% above the figure in 2018. This is a reflection of the increases in salaries and pensions including provisions for the implementation of the national minimum wage. Yet, to date the new minimum wage has not been paid. Along these lines, the cost of domestic borrowing is expected to rise in 2019 as the provisions to retire maturing bonds to local contractors decreased by at least 35% in 2019 from the 2018 figure. So the government appears stuck in trying to get an alternative source of funding the 2019 budget. Internationally, there does not appear to be much hope with the current trade war between the U.S. and China not abating and with the U.S. itself oversupplying to the world market such that crude prices are not trending upwards. OPEC appears not capable of arresting the downward trending of prices since members are not really willing to lower production levels significantly, since many of their members are in dire need of revenue to shore up the fortunes of their various economies.

This scenario is well known to Nigeria, which has over the years been always at the mercy of external forces in the management of its economy. The country’s economy has been oscillating between the booms and busts of the oil market to the extent that the country currently appears trapped – despite the recurring narrative of the current administration on the diversification of the Nigerian economy. The current managers of the economy appear to have invariably done little or nothing tangible in addressing the vexing issue, apart from lots of noise on its purported success in domestic rice production. The projected GDP growth rate in the medium term 2017-2020 Economic Recovery and Growth Plan (ERGP) of this administration for 2019 is 4.5% but the projection in the 2019 budget is 3.01%, a subtle acknowledgement by the managers of the economy that their original targets are actually unrealistic. In actual fact, the revised GDP growth rate for 2018 was a disappointing 2.1%. The releases by the National Bureau of Statistics on the growth figures for 2019 have not been reassuring at all.

So, for the country to get out of this vexatious quagmire, a number of critical steps in economy management appear compelling. First, the country would need to undertake an urgent restructuring of its revenue profile. A very pertinent question arises here. What really has happened to all the laudable projections made in the ERGP about the diversification of the revenue sources for the funding of government operations in Nigeria? Currently, independent studies indicate that the ERGP has largely underperformed on virtually all the indicators. This is the third year of the plan and nothing tangible appears to have come out from the plan in addressing this critical national problem. Hence the restructuring of government revenue sources appear compelling. Second, this country cannot run away for too long from the all-important issue of fiscal federalism where the states will generate their own revenue and pay taxes to the centre.

Quite understandably, there have been fears from certain segments of the country as to their future survival, but the truth of the matter is that any setbacks along these lines will only be short term in nature. This posture, if adopted, will open up so many untapped sources of revenue at the sub-national levels of governance such that there will be a substantial beefing up of total government revenue at all levels.

Another way out is for the country to return to land massively. The promotion of agricultural production to enhance food security, as well as exports of cash crops to supplement foreign exchange earnings from oil, is very important. However, this stance will be impossible if the current invasion of farmlands by herdsmen is not arrested immediately. Cattle rearing and crop agriculture can coexist provided that private ranching is adopted. The narrative of “farmer-herder clashes” needs to be jettisoned forthwith as it gives a wrong picture of the problem, to the disadvantage of the farmer. Agricultural production in the country has suffered significant setback in recent times, with the government unwittingly allowing this preventable problem to linger on unaddressed.

A total overhaul is necessary in the management of the Nigerian economy. It is a pity that the past, right from the military era, has been grossly mismanaged but the country needs to take a new direction for it to survive.  The country will be living in a fool’s paradise if it assumes that the current status quo can be sustained for a long time. The country can no longer postpone the doomsday if it continually pretends that all is well with the current structure of revenue generation and distribution. A stitch in time saves nine.